Description

The paper presents a general equilibrium model that combines a non- Walrasian labor market with firms setting prices on a staggered basis. The model is utilized to analyze the impact of different shocks on a set of variables under two alternative monetary policy rules. The main characteristic of the labor market is the existence of a search friction that results in a positive equilibrium rate of unemployment. Sticky prices, on the other hand, introduce a demand-sided transmission mechanism for the monetary policy that allows analysis of the effects of different shocks. The model is able to generate a positive correlation between inflation and employment (the Phillips curve) as well as the observed correlation pattern between job creation and employment and job destruction and employment. It also replicates the contemporaneous negative correlation between job creation and job destruction that is observed in the data.